IFRS 16

Lease
Calculator

Calculate initial lease liability, right-of-use asset, full amortization schedule, and copy journal entries straight into your working papers. IFRS 16.26 compliant.

Lease Terms

If checked, ROU asset depreciates over useful life instead of lease term (IFRS 16.32)

IFRS 16 Lease Audit Working Paper Template & Checklist — free PDF

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IFRS 16.26 — At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date.

IFRS 16.23–24 — At the commencement date, a lessee shall measure the right-of-use asset at cost.

ISA 500 — Sufficient appropriate audit evidence for the lease liability as independent audit evidence.

ISA 540 — Auditing accounting estimates — applies to the IBR determination and lease term judgment.

IFRS 16 Lease Accounting — Complete Methodology Guide

Why IFRS 16 Changed Everything

IFRS 16 Leases, effective since 1 January 2019, eliminated the distinction between operating and finance leases for lessees. Under the previous standard (IAS 17), entities could keep operating lease obligations off the balance sheet — a practice that obscured the true financial position of lease-heavy businesses. Airlines, retailers, and logistics companies famously had billions in unrecognised lease commitments. IFRS 16 brought transparency by requiring lessees to recognise a right-of-use (ROU) asset and a corresponding lease liability for virtually all leases, with limited exceptions for short-term leases (12 months or less) and leases of low-value assets (approximately US$5,000 or less when new).

Initial Measurement of the Lease Liability (IFRS 16.26)

At the commencement date, the lessee measures the lease liability at the present value of the lease payments that are not paid at that date. The discount rate used is the interest rate implicit in the lease, if that rate can be readily determined. If not — which is the case for most leases where the lessee does not know the lessor's residual value assumptions — the lessee uses its incremental borrowing rate (IBR). The IBR is defined as the rate of interest that the lessee would have to pay to borrow over a similar term, and with similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment (IFRS 16.26(d)).

Lease payments included in the measurement comprise: fixed payments (including in-substance fixed payments) less any lease incentives receivable; variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; amounts expected to be payable under residual value guarantees; the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate (IFRS 16.27).

Present Value Formulas

For an annuity in arrears (payments at end of each period):

PV = PMT × [(1 − (1 + r)−n) / r]

For an annuity in advance (payments at start of each period):

PV = PMT × [(1 − (1 + r)−n) / r] × (1 + r)

Where PMT is the periodic lease payment, r is the discount rate per period (annual rate divided by periods per year), and n is the total number of periods. For monthly payments with a 4.5% annual rate, r = 0.045/12 = 0.00375 per month.

Initial Measurement of the ROU Asset (IFRS 16.23–24)

The right-of-use asset is initially measured at cost, comprising: the amount of the initial measurement of the lease liability; any lease payments made at or before the commencement date, less any lease incentives received; any initial direct costs incurred by the lessee (costs that would not have been incurred if the lease had not been obtained, such as legal fees, commissions, and stamp duty); and an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site, or restoring the underlying asset to the condition required by the terms and conditions of the lease.

Subsequent Measurement — Effective Interest Method (IFRS 16.36–37)

After initial recognition, the lease liability is measured using the effective interest method. Each period: interest expense is calculated as the opening lease liability multiplied by the periodic discount rate; the interest is added to the liability; and the lease payment is deducted. This produces the closing lease liability for the period. The interest expense is recognised in profit or loss (or capitalised if IAS 23 applies). The pattern is front-loaded — interest expense is highest in the first period and decreases over the lease term as the principal balance reduces.

The ROU asset is subsequently depreciated on a straight-line basis over the shorter of the useful life of the underlying asset and the lease term (IFRS 16.31–32). If ownership of the underlying asset transfers to the lessee at the end of the lease term, or if the cost of the ROU asset reflects that the lessee will exercise a purchase option, the lessee depreciates the ROU asset from the commencement date to the end of the useful life of the underlying asset.

Worked Example: 5-Year Office Lease

Scenario:

Entity A enters a 5-year office lease commencing 1 January 2025. Monthly rent is €5,000 payable in arrears. The lessee's incremental borrowing rate is 4.5% per annum. There are no lease incentives, initial direct costs, or restoration obligations. No rent-free period.

Step 1: Determine the periodic rate. Monthly rate = 4.5% / 12 = 0.375% per month. Total periods = 60 months.

Step 2: Calculate the initial lease liability. PV = €5,000 × [(1 − (1.00375)−60) / 0.00375] = €5,000 × 53.667 = €268,336.

Step 3: Determine the initial ROU asset. ROU Asset = Lease Liability (€268,336) + Prepaid payments (€0) − Incentives (€0) + IDC (€0) + Restoration (€0) = €268,336.

Step 4: Period 1 entries. Interest expense = €268,336 × 0.375% = €1,006. Payment = €5,000. Principal reduction = €3,994. Closing liability = €264,342. ROU depreciation = €268,336 / 60 = €4,472. Total P&L impact = €5,478 (interest + depreciation).

Totals over lease term: Total interest = €31,664. Total depreciation = €268,336. Total cash outflow = €300,000. The P&L impact (€300,000) equals the cash outflow — the difference is timing, not amount.

Key Edge Cases and Practical Considerations

Rent-free periods: Interest accrues on the lease liability during rent-free months even though no cash payment is made. The lease liability increases during the rent-free period. Depreciation of the ROU asset also continues. This spreads the total lease cost over the full term including the rent-free period.

Advance vs. arrears: The payment timing toggle materially changes the present value. Payments in advance result in a higher initial lease liability because the first payment occurs at commencement (not discounted) rather than one period later. Most commercial leases require payment in advance.

Fixed escalation clauses: Annual escalation clauses with fixed percentages (e.g., 2% p.a.) are included in the lease payment schedule and all escalated payments are discounted to present value at commencement. CPI-linked escalation uses the current CPI rate at commencement — the liability is remeasured only when the actual index change triggers a payment change (IFRS 16.42(b)).

Purchase options: If the lessee is reasonably certain to exercise a purchase option, the option exercise price is included in the lease payments. The ROU asset is then depreciated over the useful life of the underlying asset rather than the lease term (IFRS 16.32), because the lessee effectively acquires the asset.

Lease modifications: Changes to the scope, consideration, or duration of a lease after commencement are lease modifications (IFRS 16.44). Modifications that are not separate leases require remeasurement of the lease liability using a revised discount rate, with the adjustment recognised against the ROU asset.

Frequently Asked Questions

What is the IFRS 16 lease liability and how is it calculated?
The IFRS 16 lease liability is the present value of future lease payments not yet paid at the commencement date (IFRS 16.26). It is calculated by discounting each future lease payment using the interest rate implicit in the lease, or if that rate cannot be readily determined, the lessee's incremental borrowing rate (IBR). Lease payments include fixed payments less incentives receivable, variable payments linked to an index or rate, residual value guarantee amounts, purchase option exercise prices if reasonably certain, and termination penalties if the lease term reflects termination.
What discount rate should I use for IFRS 16 calculations?
Use the interest rate implicit in the lease if it can be readily determined. If not (which is the case for most leases), use the lessee's incremental borrowing rate (IBR) — the rate of interest that the lessee would have to pay to borrow over a similar term, with similar security, the funds necessary to obtain an asset of similar value in a similar economic environment (IFRS 16.26(d)). The IBR is entity-specific and should reflect the entity's credit standing, the lease term, the currency, and the nature of the security.
What is the difference between payments in arrears and in advance?
Payments in arrears are made at the end of each payment period, while payments in advance are made at the beginning. This distinction materially affects the present value calculation — payments in advance result in a higher lease liability because the first payment is not discounted. The formula for an annuity in advance multiplies the standard PV annuity factor by (1 + r), where r is the periodic discount rate. Most commercial leases require payment in advance (rent due at the start of each month).
How is the right-of-use (ROU) asset measured under IFRS 16?
The ROU asset is initially measured at cost (IFRS 16.23), comprising: the initial measurement of the lease liability, plus any lease payments made at or before commencement less any lease incentives received, plus initial direct costs incurred by the lessee, plus an estimate of costs to dismantle and restore the underlying asset (IFRS 16.24). The ROU asset is subsequently depreciated on a straight-line basis over the shorter of the asset's useful life and the lease term, unless ownership transfers or a purchase option is reasonably certain to be exercised.
What is the short-term lease exemption under IFRS 16?
IFRS 16.5(a) permits a lessee to elect not to recognise a right-of-use asset and lease liability for short-term leases — leases that, at the commencement date, have a lease term of 12 months or less. The assessment includes any extension options the lessee is reasonably certain to exercise. If the short-term exemption is applied, lease payments are recognised as an expense on a straight-line basis over the lease term. The election is made by class of underlying asset.
What is the low-value asset exemption and what threshold applies?
IFRS 16.5(b) permits a lessee to elect not to recognise leases where the underlying asset is of low value. The IASB's Basis for Conclusions (IFRS 16.BC100) indicates a threshold of approximately US$5,000 or less when the asset is new. The assessment is based on the value of the asset when new, regardless of the age of the asset or the size of the lessee. Typical qualifying assets include laptops, tablets, small office furniture, and desk phones. The exemption applies on a lease-by-lease basis.
How do rent-free periods affect the IFRS 16 calculation?
Rent-free periods at the start of a lease are included in the lease term, but the payments during those periods are zero. The lease liability is the present value of all payments (including the zero payments during the rent-free period and the actual payments thereafter). Interest accrues on the lease liability during the rent-free period, increasing the liability. Depreciation of the ROU asset also continues during the rent-free period. The effect is that the total cost of the lease is spread over the full lease term including the rent-free period.
How does annual escalation affect the lease liability?
Fixed annual escalation clauses (e.g., 2% per annum) are included in the lease payment schedule for IFRS 16 measurement. Each year's escalated payment is discounted to present value at commencement. This increases the lease liability compared to using flat payments. Variable escalation linked to an index (e.g., CPI) uses the current index rate at commencement — the lease liability is not remeasured for expected future index changes, only when the actual index change triggers a payment adjustment (IFRS 16.42(b)).
What is the current/non-current split of the lease liability?
At each reporting date, the lease liability is split between current (due within 12 months) and non-current (due after 12 months). The current portion represents the principal element of lease payments due in the next 12 months. The non-current portion is the remaining lease liability. This split is required for balance sheet presentation under IAS 1 and affects current ratio and working capital calculations.
How do I audit a client's IFRS 16 lease calculations?
Under ISA 500, the auditor needs sufficient appropriate audit evidence for the lease liability. Key procedures include: independently recalculating the present value of lease payments (this calculator provides that), verifying the discount rate methodology against market data (ISA 540), testing lease population completeness by reviewing contracts and commitments, assessing lease term judgments for extension and termination options, verifying the accuracy of the amortization schedule, and checking the current/non-current classification at the reporting date.

Industry-Specific IFRS 16 Calculators

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Country-Specific IFRS 16 Guides

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Related Audit Tools

Materiality Calculator ISA 320 — ROU asset depreciation materiality Going Concern Checklist ISA 570 — lease-heavy entities and liquidity Sampling Calculator ISA 530 — lease population sampling